Diamond Chemicals Case Study11_final 1axs
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Diamond Chemicals Case Study Masters in Finance | Applied Corporate Finance
Nova School of Business and Economics 8th February 2016 NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
GROUP 5A Francisco Santos, 2273 João Santa Bárbara, 2274 José Barbosa, 2329 Luís Colaço, 2548 Miguel Pinto, 2316
Agenda Executive Summary Industry Overview The Merseyside Project Project’s Valuation Process Project’s Attractiveness GO/ NO GO Analysis
Mutually exclusive? Merseyside vs Rotterdam NPV and EPS IRR and Payback
Strategic Comparison Recommendations NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
2
Executive summary
Diamond Chemicals is one of the largest privately owned chemical companies in the US. In of production cost per ton of polypropylene, the firm is not doing better than average, which is understandable given the age of its two factories. Furthermore, Diamond Chemicals is under pressure to increase its financial performance. This case focuses on the study of the two projects that have the goal of increasing the production efficiency of the company: Merseyside project: reducing cost by renovating and rationalizing the production line. Rotterdam project: introducing a new technology. The group provided a thorough analysis and a few suggestions were made regarding how to deal with the found errors. Finally, the group compared both projects, and after concluding that they SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | 3 are indeed NOVA mutually exclusive, GROUP 5Adecided on the recommendation. The
Industry Overview
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
4
Project’s Valuation Process
EPC project (exclude) • Impact on NPV +£0,00M • Action: tell the assistant plant manager that both projects are separate and therefore should be analyzed independently.
Cannibalization (include) • Impact on NPV -£3,20M • Action: Because of the project, sales may decrease in the Rotterdam factory
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
5
Project’s Valuation Process
Engineering costs (exclude) • Impact on NPV +£0,32M • Action: The engineering costs (£500.000) should not be included since they were already incurred no matter if the project is implemented or not
45 days shutdown (include) • This scenario was already included on the valuation, we believe that a strong company would only have the impact of the loss on production. It is however arguable that could be some indirect costs like losing some clients. • Action: Part of this issue is already included in the NPV with the lost output. However, the group believes that there would be also a potential loss of some clients, which is not being taken into . NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
6
Project’s Valuation Process
Inflation (include) • Impact on NPV +£2,89M • Action: Acknowledge that the Treasury Staff was right. Since the Cash flows did not include inflation, then the discount rate had to be the real one. Or, as we suggest, keep using the nominal discount rate and add the 3% inflation estimated by the Treasury staff.
Rolling stock (include) • Impact on NPV -£3,33M • Action: She should tell the Transport Division that they are correct. Since the purchase of the rolling stock would not occur without the project, than it is a direct consequence of the project and therefore should be taken into .
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
7
Project’s Valuation Process
Initial NPV £9M EPC Project £0M Cannibalization £3.2M Engineering Costs £0.32M Inflation
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
8
Agenda Executive Summary Industry Overview The Merseyside Project Project’s Valuation Process Project’s Attractiveness GO or NO GO Analysis
Mutually exclusive? Merseyside vs Rotterdam NPV and EPS IRR and Payback
Strategic Comparison Recommendations NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
9
Project’s Attractiveness NPV = +£5.68M
IRR = 24%
Financial View EPS = +£0.0611 per Payback = 4.08 share years
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
10
Project’s Attractiveness Increase productivity
No learning curve, short term solution.
Strategic Flexibility in View of 45 day shutdown, which will
change in technology
possibly result in a loss on both clients and production
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
11
GO or NO GO Analysis Because of: Meeting all financial requirements Increasing the company’s productivity Being flexible to change to a new technology
Morris should continue to promote the project for funding NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
12
Mutually Exclusive? Exclusivity in Demand? Assuming that the market stays constant for 15 years Setting the annual output equal to 250.000 tons in both factories The NPV is still positive in both projects, therefore they are not mutually exclusive in demand However and since the group does not have enough information, we believe that the projects may be mutually exclusive due to budget constrains or strategic goals. NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
13
Agenda Executive Summary Industry Overview The Merseyside Project Project’s Valuation Process Project’s Attractiveness GO or NO GO Analysis
Mutually exclusive? Merseyside vs Rotterdam NPV and EPS IRR and Payback Strategic Comparison
Recommendations
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
14
NPV and EPS Merseysi de
Rotterdam
NPV =GBP 5,68 M
NPV = GBP 17,31 M
EPS = 0,0611
EPS =0,1863
Why: Projects of different nature, Different initial investments, Different strategic goals, Different investment phases, Different Gross Margins…
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
15
IRR and Payback Merseysi de
Rotterdam
IRR =24,03%
IRR = 19,03%
Payback = 4,08 Years
Payback = 8,17 years
Different Cash Flow timings: • Implementation takes 45 days at Merseyside and 3 years in Rotterdam. • Rotterdam only reaches full capacity in 2004 while Merseyside is in 2002 • Rotterdam only fully explores the learning curve after 2009 (Achieves NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | the greatest Gross Margin) GROUP 5A
16
Strategic Comparison Merseyside • Fits all the four performance hurdles • Quickly implemented • No learning curve, short term solution • The Gross Margin starts decreasing after year 5, which reflects its short horizon
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
17
Strategic Comparison Rotterdam • Greater NPV • Long term horizon • Explore the learning curve • Only meets three of the requirements • Relies on the analysis of external consultants NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
18
Recommendation
The financials (NPV) suggest:
We want a long term investment
Flexibility of the other factory
Rotterda m project NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
19
Thank you for your attention.
Nova School of Business and Economics 8th February 2016 NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
GROUP 5A Francisco Santos, 2273 João Santa Bárbara, 2274 José Barbosa, 2329 Luís Colaço, 2548 Miguel Pinto, 2316
Nova School of Business and Economics 8th February 2016 NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
GROUP 5A Francisco Santos, 2273 João Santa Bárbara, 2274 José Barbosa, 2329 Luís Colaço, 2548 Miguel Pinto, 2316
Agenda Executive Summary Industry Overview The Merseyside Project Project’s Valuation Process Project’s Attractiveness GO/ NO GO Analysis
Mutually exclusive? Merseyside vs Rotterdam NPV and EPS IRR and Payback
Strategic Comparison Recommendations NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
2
Executive summary
Diamond Chemicals is one of the largest privately owned chemical companies in the US. In of production cost per ton of polypropylene, the firm is not doing better than average, which is understandable given the age of its two factories. Furthermore, Diamond Chemicals is under pressure to increase its financial performance. This case focuses on the study of the two projects that have the goal of increasing the production efficiency of the company: Merseyside project: reducing cost by renovating and rationalizing the production line. Rotterdam project: introducing a new technology. The group provided a thorough analysis and a few suggestions were made regarding how to deal with the found errors. Finally, the group compared both projects, and after concluding that they SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | 3 are indeed NOVA mutually exclusive, GROUP 5Adecided on the recommendation. The
Industry Overview
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
4
Project’s Valuation Process
EPC project (exclude) • Impact on NPV +£0,00M • Action: tell the assistant plant manager that both projects are separate and therefore should be analyzed independently.
Cannibalization (include) • Impact on NPV -£3,20M • Action: Because of the project, sales may decrease in the Rotterdam factory
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
5
Project’s Valuation Process
Engineering costs (exclude) • Impact on NPV +£0,32M • Action: The engineering costs (£500.000) should not be included since they were already incurred no matter if the project is implemented or not
45 days shutdown (include) • This scenario was already included on the valuation, we believe that a strong company would only have the impact of the loss on production. It is however arguable that could be some indirect costs like losing some clients. • Action: Part of this issue is already included in the NPV with the lost output. However, the group believes that there would be also a potential loss of some clients, which is not being taken into . NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
6
Project’s Valuation Process
Inflation (include) • Impact on NPV +£2,89M • Action: Acknowledge that the Treasury Staff was right. Since the Cash flows did not include inflation, then the discount rate had to be the real one. Or, as we suggest, keep using the nominal discount rate and add the 3% inflation estimated by the Treasury staff.
Rolling stock (include) • Impact on NPV -£3,33M • Action: She should tell the Transport Division that they are correct. Since the purchase of the rolling stock would not occur without the project, than it is a direct consequence of the project and therefore should be taken into .
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
7
Project’s Valuation Process
Initial NPV £9M EPC Project £0M Cannibalization £3.2M Engineering Costs £0.32M Inflation
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
8
Agenda Executive Summary Industry Overview The Merseyside Project Project’s Valuation Process Project’s Attractiveness GO or NO GO Analysis
Mutually exclusive? Merseyside vs Rotterdam NPV and EPS IRR and Payback
Strategic Comparison Recommendations NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
9
Project’s Attractiveness NPV = +£5.68M
IRR = 24%
Financial View EPS = +£0.0611 per Payback = 4.08 share years
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
10
Project’s Attractiveness Increase productivity
No learning curve, short term solution.
Strategic Flexibility in View of 45 day shutdown, which will
change in technology
possibly result in a loss on both clients and production
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
11
GO or NO GO Analysis Because of: Meeting all financial requirements Increasing the company’s productivity Being flexible to change to a new technology
Morris should continue to promote the project for funding NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
12
Mutually Exclusive? Exclusivity in Demand? Assuming that the market stays constant for 15 years Setting the annual output equal to 250.000 tons in both factories The NPV is still positive in both projects, therefore they are not mutually exclusive in demand However and since the group does not have enough information, we believe that the projects may be mutually exclusive due to budget constrains or strategic goals. NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
13
Agenda Executive Summary Industry Overview The Merseyside Project Project’s Valuation Process Project’s Attractiveness GO or NO GO Analysis
Mutually exclusive? Merseyside vs Rotterdam NPV and EPS IRR and Payback Strategic Comparison
Recommendations
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
14
NPV and EPS Merseysi de
Rotterdam
NPV =GBP 5,68 M
NPV = GBP 17,31 M
EPS = 0,0611
EPS =0,1863
Why: Projects of different nature, Different initial investments, Different strategic goals, Different investment phases, Different Gross Margins…
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
15
IRR and Payback Merseysi de
Rotterdam
IRR =24,03%
IRR = 19,03%
Payback = 4,08 Years
Payback = 8,17 years
Different Cash Flow timings: • Implementation takes 45 days at Merseyside and 3 years in Rotterdam. • Rotterdam only reaches full capacity in 2004 while Merseyside is in 2002 • Rotterdam only fully explores the learning curve after 2009 (Achieves NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | the greatest Gross Margin) GROUP 5A
16
Strategic Comparison Merseyside • Fits all the four performance hurdles • Quickly implemented • No learning curve, short term solution • The Gross Margin starts decreasing after year 5, which reflects its short horizon
NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
17
Strategic Comparison Rotterdam • Greater NPV • Long term horizon • Explore the learning curve • Only meets three of the requirements • Relies on the analysis of external consultants NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
18
Recommendation
The financials (NPV) suggest:
We want a long term investment
Flexibility of the other factory
Rotterda m project NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
19
Thank you for your attention.
Nova School of Business and Economics 8th February 2016 NOVA SCHOOL OF BUSINESS AND ECONOMICS | APPLIED CORPORATE FINANCE | GROUP 5A
GROUP 5A Francisco Santos, 2273 João Santa Bárbara, 2274 José Barbosa, 2329 Luís Colaço, 2548 Miguel Pinto, 2316
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